Global Foreign Investment Surge Masks Underlying Weakness as Developed Economies Dominate 2025 Growth

Global foreign direct investment (FDI) climbed 14% in 2025 to reach $1.6 trillion, marking a rebound after two consecutive years of decline, according to preliminary estimates released by UN Trade and Development (UNCTAD) on January 20, 2026. However, the headline growth figure conceals troubling underlying trends that point to widening disparities between developed and developing economies, increasing concentration in capital-intensive sectors, and persistent weakness in investments critical for sustainable development.

The recovery in global investment flows comes with significant caveats. More than $140 billion of the increase stemmed from flows through global financial centers, often referred to as “conduit flows” that serve as transfer points for investments rather than representing real economic activity. Stripping out these financial intermediation flows reveals a more modest 5% increase in underlying investment activity, highlighting what UNCTAD describes as fragile momentum in productive capital deployment.

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Investor Sentiment Remains Cautious Despite Recovery

Key indicators of investor confidence paint a sobering picture beneath the surface-level growth. The value of international mergers and acquisitions fell by 10% in 2025, reflecting heightened caution among dealmakers navigating geopolitical uncertainty and regulatory complexity. This decline continues a pattern observed throughout the year, with cross-border M&A activity facing headwinds from tariff concerns and expanded CFIUS reviews in the United States.

International project finance experienced an even steeper decline, falling 16% in value and 12% in deal numbers. This marks the fourth consecutive year of contraction, with financing levels reaching their lowest point since 2019. The persistent weakness in project finance is particularly concerning given its critical role in funding large-scale infrastructure projects, especially in developing economies that lack sufficient domestic capital.

Announcements of greenfield projects—new, from-scratch foreign investment ventures—dropped by 16% in number, though total values remained elevated due to a small number of mega-projects. This concentration in large-scale developments suggests that while a handful of transformative projects are moving forward, the broader pipeline of new foreign investment initiatives has contracted significantly.

Developed Economies Capture Disproportionate Share of Investment Growth

The geographic distribution of FDI flows in 2025 revealed a stark divergence between developed and developing economies. FDI flows to developed countries surged 43% to reach $728 billion, driven primarily by Europe and major financial hubs. The European Union experienced a remarkable 56% increase in inflows, supported by large cross-border acquisitions and economic rebounds in Germany, France, and Italy.

In sharp contrast, flows to developing economies declined by 2% to $877 billion, continuing a troubling trend that has seen these countries increasingly marginalized in global investment patterns. The situation proved most dire for lower-income countries, with three-quarters of least developed countries (LDCs) experiencing stagnant or declining investment flows. This widening gap threatens to deepen existing economic inequalities and undermine progress toward the 2030 Agenda for Sustainable Development.

UNCTAD Secretary-General Rebeca Grynspan emphasized the systemic nature of this challenge, noting that “too many economies are being left behind not for lack of potential—but because the system still sends capital where it’s easiest, not where it’s needed.” The concentration of investment in high-income economies reflects not only perceived risk differentials but also structural advantages in infrastructure, regulatory frameworks, and access to financing that developing nations struggle to match.

Data Centers and AI Infrastructure Drive Technology Investment Boom

The 2025 investment landscape was dominated by a dramatic surge in capital-intensive, technology-driven projects, particularly data centers supporting artificial intelligence applications. Data centers attracted more than one-fifth of global greenfield project values, with announced investments exceeding $270 billion—a figure that underscores the unprecedented scale of the AI infrastructure buildout.

France emerged as the leading destination for data center investment with $69 billion in announced projects, followed by the United States at $29 billion and the Republic of Korea at $21 billion. Emerging markets including Brazil, India, Thailand, and Malaysia also attracted significant projects, though at substantially lower levels. This geographic concentration means that ten countries accounted for 80% of all new digital projects globally.

The data center investment boom reflects the enormous capital requirements of modern AI systems. According to industry analysis, eight major hyperscalers—including Microsoft, Amazon, Google, and Meta—expect capital expenditures to increase 44% year-over-year to $371 billion in 2025 for AI data centers and computing resources. Microsoft alone committed $80 billion in AI-enabled data center investments, with more than half allocated to U.S.-based projects.

The scale of investment extends beyond just facility construction. Global data center infrastructure spending is projected to surpass $1 trillion in annual expenditures by 2030, driven by demand for specialized servers, advanced cooling systems, and robust power infrastructure. However, this concentration of investment in AI-related infrastructure has sparked concerns about whether these capital-intensive projects generate sufficient economic spillovers to justify their dominance in global FDI flows.

Semiconductor Sector Experiences Selective Growth Amid Supply Chain Pressures

The semiconductor industry saw the value of newly announced greenfield projects rise by 35% in 2025, reflecting continued efforts to build resilient supply chains and meet surging demand for advanced chips. Companies in the semiconductor ecosystem have announced more than half a trillion dollars in private-sector investments to revitalize chip manufacturing capabilities, with particular focus on the United States, which aims to triple its chipmaking capacity by 2032.

Major projects drove this growth, including Amkor Technology’s expansion to $7 billion for an advanced packaging campus in Arizona, and SK Hynix’s $3.87 billion memory chip facility in Indiana. These investments reflect government incentives through programs like the CHIPS and Science Act, which have mobilized substantial private capital through subsidies and tax credits.

However, the semiconductor investment boom has been geographically concentrated. Globally, companies plan to invest approximately $1 trillion in semiconductor fabs through 2030, with most investment concentrated in Asia and the United States. The industry faces significant challenges in scaling this expansion, including talent shortages, lengthy construction timelines, and supply chain constraints for critical equipment.

Traditional Manufacturing Sectors Face Sharp Contraction

While technology-driven sectors flourished, traditional manufacturing industries experienced severe headwinds. Project numbers fell sharply by 25% in tariff-exposed, global value chain-intensive sectors, with textiles, electronics, and machinery particularly affected. This contraction reflects the compound impact of trade tensions, supply chain de-risking strategies, and the shift in investor preference toward digital economy projects.

The decline in manufacturing investment has significant implications for developing economies, which have historically relied on labor-intensive manufacturing to drive industrialization and employment growth. As investment flows away from these sectors, countries risk losing opportunities to integrate into global value chains and capture the benefits of industrial upgrading.

UNCTAD’s analysis suggests that while investment in technology-driven, capital-intensive projects lifts overall FDI figures, these flows remain highly concentrated and generate limited spillovers to broader economic development. The organization recommends that policies should aim to link digital infrastructure investment more closely to skills development, innovation systems, and local value creation to ensure more inclusive benefits.

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Renewable Energy Investment Faces Headwinds Despite Climate Urgency

International infrastructure projects fell by 10% in 2025, largely due to a sharp pullback in renewable energy as investors reassessed revenue risks and regulatory uncertainty. This decline is particularly troubling given the urgent need to accelerate clean energy deployment to meet climate goals and the Sustainable Development Goals financing gap, estimated at $4 trillion per year in developing countries.

The renewable energy sector faced a complex investment environment in 2025. While total renewable energy investments reached a record $386 billion in the first half of 2025, asset finance for utility-scale solar and onshore wind declined 13%, reflecting what analysts describe as investors “rethinking capital allocation” in response to adverse policy environments in key markets.

The United States experienced the steepest decline, with renewable energy investment dropping $20.5 billion or 36% in the first half of 2025 compared to the previous period. This reflected the impact of earlier-than-expected phase-outs of investment tax credits, new foreign entity restrictions, and executive orders affecting offshore wind leasing and permitting on federal lands.

International project finance for infrastructure—often crucial for large-scale renewable energy developments—fell by 26% in 2024, with the drop being especially steep in sectors critical to achieving sustainable development goals. Renewable energy financing declined 31%, transport infrastructure fell 32%, and water and sanitation projects dropped 30%.

Domestic investors increasingly filled the gap left by retreating international capital, with domestically led infrastructure projects rebounding strongly in some markets. However, this shift risks widening investment gaps in countries that depend on international financing for large-scale infrastructure projects, particularly in sub-Saharan Africa and other developing regions where domestic capital markets remain underdeveloped.

Cross-Border M&A Activity Slows Amid Geopolitical Tensions

The 10% decline in international merger and acquisition values reflects broader challenges in cross-border dealmaking. According to PwC’s analysis, while cross-border deal volume declined 12% globally in 2025, the impact varied significantly by region, with Latin America experiencing a 23% surge even as other markets contracted.

In the United States, dealmaking experienced its weakest start in a decade in January 2025, with mergers and acquisitions dropping nearly 30% compared to the previous year. Elevated tariffs, expanded Committee on Foreign Investment in the United States (CFIUS) reviews, and regulatory uncertainty have created significant headwinds for cross-border transactions.

The challenges extend beyond regulatory hurdles. Dealmakers report that 48% of deals now face secondary sanction risks, while 61% of nations mandate in-country data storage for acquisitions, and 37 new critical technology transfer bans were enacted in just the second quarter of 2025. This proliferation of restrictions has made cross-border dealmaking increasingly complex and expensive.

Cultural integration challenges and currency volatility have added further complications. Research indicates that national cultural differences continue to negatively impact cross-border M&A activity, though this effect has declined over time as firms gain experience navigating international transactions. The European Union saw some bright spots, with investment rising nearly $30 billion or 63% in the first half of 2025, suggesting capital reallocation from other regions.

Africa and Least Developed Countries Face Deepening Investment Crisis

The geographic concentration of FDI flows has left Africa and other developing regions increasingly marginalized. Despite being home to 20% of the world’s population, Africa accounts for just 2% of global clean energy investment. Total energy investment across the continent has fallen by one-third over the past decade, as declining fossil fuel spending has not been offset by sufficient growth in clean energy financing.

The financing challenges facing African countries are particularly acute. Currency depreciation and higher interest rates have made it increasingly difficult to access and service debt, with debt servicing costs equivalent to over 85% of total energy investment in Africa in 2025. This debt burden crowds out productive investment and creates a vicious cycle where high costs of capital deter international investors, further limiting development prospects.

For least developed countries specifically, the situation has grown more dire. Three-quarters of LDCs experienced stagnant or declining FDI flows in 2025, with investment in these nations on track to potentially hit their lowest levels since 2015. The concentration of digital economy investment in just ten countries means that many developing economies are being excluded from the digital boom due to persistent gaps in infrastructure, regulatory frameworks, and technical skills.

UNCTAD warns that closing the financing gap for sustainable development alone would require an estimated $4 trillion per year in developing countries—a target that is becoming more distant rather than closer. Without coordinated international action to mobilize capital for these economies, the development divide risks widening further.

Policy Fragmentation and Economic Uncertainty Shape Investment Patterns

The investment landscape in 2025 has been profoundly shaped by geopolitical tensions, trade fragmentation, and intensifying industrial policy competition. These dynamics have redrawn global investment maps and eroded long-term investor confidence, creating what UNCTAD describes as a pattern of productive capital flows being diverted away from where they are most needed.

Trade tensions have triggered what some analysts call “green protectionism,” with the European Union and United States erecting tariff walls to protect domestic manufacturers in strategic sectors. While these measures aim to enhance supply chain sovereignty and energy security, they risk slowing the pace of technological diffusion and increasing costs for clean energy transitions globally.

Industrial policy has become a dominant force shaping investment decisions. Government incentives, from the U.S. CHIPS Act to China’s strategic investments in solar, wind, and battery manufacturing, have mobilized hundreds of billions in private capital. However, this state-directed approach has also contributed to market fragmentation, with companies facing different regulatory requirements, subsidy regimes, and compliance standards across jurisdictions.

The cumulative effect of these policies has been to create a more volatile and uncertain investment environment. Investors report growing caution about committing capital to long-term projects given the potential for sudden policy shifts, regulatory changes, or geopolitical disruptions that could fundamentally alter project economics.

Digital Economy Concentration Raises Equity Concerns

The concentration of FDI in digital economy projects, while driving impressive headline growth figures, has sparked concerns about equity and inclusivity. FDI in the digital economy grew 14% in recent periods, led by information and communication technology manufacturing, digital services, and semiconductors. However, this growth has remained heavily concentrated in a small number of countries.

The challenge extends beyond just geographic concentration. Capital-intensive AI infrastructure projects require enormous upfront investments—often billions of dollars for a single data center campus—and generate relatively few direct jobs compared to their scale. While these projects may create spillover benefits through energy demand, construction activity, and enabling digital services, the distribution of these benefits remains highly uneven.

UNCTAD has called for policies that link digital infrastructure investment more closely to skills development, innovation systems, and local value creation. This includes requirements for technology transfer, local content provisions, and partnerships with domestic firms and research institutions. Without such measures, developing countries risk becoming mere hosts for infrastructure that primarily benefits foreign companies and serves external markets.

Outlook for 2026 Remains Fragile Despite Potential for Modest Growth

Looking ahead to 2026, UNCTAD projects that FDI flows could increase modestly if financing conditions continue to ease and cross-border merger and acquisition activity picks up. Lower interest rates in some major economies and stabilizing currency markets could encourage renewed dealmaking, while pent-up demand for strategic assets may drive selective large transactions.

However, substantial downside risks remain. Geopolitical tensions show no signs of abating, with ongoing conflicts, trade disputes, and strategic competition between major powers continuing to cloud the investment outlook. Policy uncertainty—particularly around trade policy, regulatory approaches to foreign investment, and climate commitments—makes it difficult for investors to assess long-term risks and returns.

Economic fragmentation poses perhaps the most fundamental challenge. The trend toward regionalization of supply chains, friend-shoring of critical industries, and diverging regulatory standards threatens to fragment the global economy into competing blocs. This fragmentation increases transaction costs, reduces efficiency gains from international integration, and limits opportunities for developing countries to participate in global value chains.

Without coordinated international action, UNCTAD warns that global investment risks becoming even more concentrated in a few regions and sectors. This would exacerbate existing inequalities, undermine progress toward sustainable development goals, and potentially store up longer-term political and economic tensions as left-behind regions fall further behind.

Call for Systemic Reform to Redirect Capital Flows

The patterns evident in 2025 investment flows have prompted calls for fundamental reform of the international investment architecture. UNCTAD Secretary-General Rebeca Grynspan has emphasized that reversing the current trends requires “not just more capital, but smarter capital—long-term, inclusive, and aligned with sustainable development.”

Proposed reforms focus on seven priority areas: improving data and artificial intelligence governance to support sound digital development strategies; developing policy toolkits tailored to digital investment needs in developing countries; advancing global rules for digital trade and investment through multilateral dialogue; strengthening digital infrastructure through global partnerships and blended finance; enhancing international cooperation on tax matters; improving investment facilitation; and scaling up development finance.

The emphasis on blended finance—combining public and private capital—reflects recognition that purely market-driven approaches have proven insufficient to direct investment toward development priorities. International public finance needs to be scaled up and used strategically to de-risk projects, provide guarantees, and create conditions that attract larger volumes of private capital to underserved markets.

As the Fourth International Conference on Financing for Development approaches, the findings from 2025 investment patterns underscore the urgency of addressing the widening gap between capital flows and development needs. The choice, as framed by UNCTAD, is whether the international community will reshape investment and finance systems to support inclusive growth, or allow current trends to deepen divisions between the world’s haves and have-nots.

The $1.6 trillion in global FDI recorded in 2025 represents substantial capital deployment, but its concentration in developed economies, technology sectors, and capital-intensive projects means that much of the developing world continues to be bypassed by investment flows that could transform lives and livelihoods. Making good on the promise of foreign investment to drive broad-based development will require concerted action to reform policies, reduce risks, and redirect capital toward where it can have the greatest developmental impact.

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By: Montel Kamau

Serrari Financial Analyst

21st January, 2026